Which of the following variables are required to calculate the value of a bond?

• A. Face value, dividend yield, and number of shares outstanding
• B. Market price, book value, and par value
• C. Coupon rate, stock price, and earnings per share
• D. Face value, coupon rate, market interest rate, and time to maturity

Answer: (D)

Verified step by step guidance

1. Understand the concept of a bond: A bond is a fixed-income instrument representing a loan made by an investor to a borrower. Its value is determined by several key variables.
2. Identify the required variables: To calculate the value of a bond, the essential variables are Face Value (the principal amount to be repaid at maturity), Coupon Rate (the annual interest rate paid on the bond), Market Interest Rate (the prevailing rate in the market), and Time to Maturity (the remaining time until the bond matures).
3. Recognize the formula for bond valuation: The value of a bond is typically calculated using the Present Value (PV) of its future cash flows, which include periodic coupon payments and the repayment of the face value at maturity.
4. Break down the calculation process: To calculate the bond value, you need to compute the Present Value of the coupon payments using the formula \( PV = \frac{C}{(1 + r)^t} \), where \( C \) is the coupon payment, \( r \) is the market interest rate, and \( t \) is the time period. Then, calculate the Present Value of the face value using \( PV = \frac{FV}{(1 + r)^T} \), where \( FV \) is the face value and \( T \) is the time to maturity.
5. Combine the results: Add the Present Value of the coupon payments and the Present Value of the face value to determine the total bond value.